Last week, food delivery company Deliveroo (LSE: ROO) listed on the London Stock Exchange via an Initial Public Offering (IPO). It’s fair to say the IPO was a flop. On Thursday, the stock closed at 282p – about 28% below the opening price of 390p.
Has Deliveroo’s share price fall created an opportunity for me to buy the growth stock at an attractive valuation? Let’s take a look at the investment case.
Deliveroo shares: the bull case
There are a few things I like about Deliveroo from an investment point of view. One is that the company – whose mission is to be the ‘definitive’ online food company – is growing at a rapid rate. In 2020, for example, gross transaction value (GTV) rose by 64% to £4.1bn. Meanwhile, underlying full-year revenue rose 58% to £1.2bn.
It’s worth noting that, while Deliveroo has experienced rapid growth so far, it believes it’s “only just getting started.” It says that bringing the food category online represents an ‘enormous’ market opportunity.
I also like the fact that the company is founder-led. Will Shu started the company back in 2013 and he’s still CEO. He’s also the majority shareholder, which means he’ll be keen to see the company (and the share price) do well. Quite often, founder-led companies turn out to be good investments.
The risks
I do have some concerns over Deliveroo shares. One is the company’s still generating large losses. Last year, it registered an operating loss of £221m. The year before, the operating loss was £320m. This adds risk to the investment case. I tend to avoid unprofitable companies unless the opportunity is really compelling.
It’s also worth pointing out that the path to profitability could be challenging. Recently, the Supreme Court ruled that drivers at gig economy rival Uber are workers and not self-employed. This looks set to cost the company hundreds of millions of dollars.
This could have big implications for Deliveroo. It may have to improve pay and conditions for its delivery workers. Many large institutional investors such as Legal & General, Aberdeen Standard, and Aviva are avoiding Deliveroo shares due to concerns over workers’ rights.
Another concern is that the company faces heavy competition from the likes of Uber Eats, Just Eat, and delivery companies in other countries. It’s certainly not alone in the food delivery space. Rivals could steal market share. Does it have a strong competitive advantage? I’m not so sure.
Finally, there’s the valuation. At the current share price, Deliveroo sports a market capitalisation of about £5.5bn. Looking at the price-to-sales ratio (4.6, using last year’s revenue), that market-cap isn’t outrageous by tech stock standards. However, it does add a bit of risk, given the lack of profitability and the threat of regulatory intervention.
ROO shares: my move now
Weighing everything up, I’m going to keep Deliveroo shares on my watchlist for now.
I think there are probably safer growth stocks I could buy right now.
